Stocks have been on a roll over the past few years, with high double-digit returns from 2023 through the end of last year. But strong performance also has many investors concerned, especially those with extra cash on the sidelines. With elevated valuations and noisy headlines, I often hear investors say: “At these levels, I’d rather wait for a pullback before investing.”
In stock market parlance, this approach is commonly referred to as “buying the dip.” But recent quantitative research shows that such a strategy is flawed, and it can actually hurt investor returns over time.
To be fair, I understand the appeal of a ‘buying the dip’ approach. By waiting for markets to pull back, investors hope to capitalize by buying at a better entry point. It makes sense. But the issue is that historically, markets do not offer these types of opportunities as often as investors might think they do. Indeed, equities spend far more time near highs than in deep or prolonged drawdowns, and when pullbacks do occur, they tend to be short, sharp, and unpredictable. They also tend to follow strong rallies, which “buy-the-dip” investors often end up sitting out.
New quantitative research puts this all in perspective.
A recent study1 tested nearly 200 different “buy the dip” rule sets across long market histories. The findings: more than 60% of the strategies produced worse risk-adjusted outcomes (expressed as a Sharpe ratio) than buy-and-hold strategies. The shortfall wasn’t trivial: across the full sample, the average Sharpe ratio for dip-buying strategies was about 0.04 lower than buy-and-hold.
Notably, the results were even less forgiving in the modern era. Using a post-1989 sample through late 2025, the same research found the average dip-buying strategy delivered a Sharpe ratio about 0.27 lower than staying invested, roughly cutting the dip-buying strategy’s risk-adjusted effectiveness nearly in half. Put another way, over the past 35 years, systematically “buying the dip” created more risk for less return. Most investors don’t want that.
Why did the dip-buying strategies often underperform? Because of the structural cost of waiting.
Dip-buying strategies require investors to sit in cash while markets move. During strong periods, equities compound returns through earnings growth and reinvestment, while cash earns little by comparison. Missing even a handful of strong days can have a meaningful impact on long-term outcomes, particularly when earnings growth remains robust, as it did in 2025. As seen in the chart below, missing even just the 10 best days in the market over a long stretch can seriously impact returns to the downside.
For investors who might be waiting to “buy the dip” today, it’s important to reckon with the fact that earnings growth remains strong, while fiscal and monetary policy are factoring as tailwinds. Stocks are due for a pullback, sure. But how much longer could stocks potentially rally before that meaningful correction arrives? That brings up the question of opportunity cost, which “buy the dip” investors must consider.
Remember, waiting for a pullback is not a neutral decision. It is a timing call, and it’s one that history suggests is very difficult to execute successfully. What tends to work better than waiting for the perfect entry is participation with discipline. Dollar-cost averaging can reduce timing risk, while diversification and rebalancing allow investors to manage valuation concerns without stepping entirely to the sidelines. These approaches acknowledge the uncertainty without requiring precision or perfection.
Bottom Line for Investors
I do not want to dismiss investor concerns about valuation. The S&P 500 index trades near 22 times forward earnings, which is close to recent cycle highs. But valuation alone rarely determines short- or intermediate-term returns. In 2025, earnings growth was the primary driver of stock market returns, with roughly two-thirds of the S&P 500’s total return coming from earnings growth. The remainder was split between dividends and only modest changes in valuation multiples. Another strong year for corporate earnings could deliver a similar result.
At the end of the day, in environments where fundamentals remain supportive, the cost of waiting often outweighs the benefit of buying slightly lower—which again, is very difficult to execute.
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